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Qualifying scheme will likely drive property prices down with discounts similar to ABSD

By 99.co

Due to recent publicity, most Singaporean property buyers are now aware of the ABSD on developers. This is a 15 per cent tax on developments that cannot be completed and sold out within five years. There has been much speculation that this could lead to steep price discounts as the five-year limit closes. However, many buyers are unaware that another factor – the Qualifying Certificate scheme – can also drive prices down the same way.

What is the Qualifying Certificate scheme?

The Qualifying Certificate (QC) is a condition imposed on foreign property developers. “Foreign” is defined by the presence of non-Singaporeans as directors as well as shareholders. This means that, by default, listed companies are foreign developers (foreigners can buy shares in it). Privately owned companies, such as Far East Organisation, will avoid these QC charges.

QC requires that a development be completed in five years. All units in the development must be sold two years after completion. Failing that, the developer will forfeit 10 per cent of the land purchase price (this amount is put down at the time of the land purchase). Developers can extend the time period to sell the units, to a maximum of three years. There are fees levied for extensions:

  • First year extension - 8 per cent of purchase price

  • Second year extension – 16 per cent of purchase price

  • Third year and subsequent extensions – 24 per cent of purchase price

Last year, it was reported that developers could face losses of up to $238 million in 2016, due to extension charges. The segment worst hit by QC extensions, at present, is the luxury market. Various cooling measures, such as a 15 per cent added tax for foreign property buyers (the Additional Buyers Stamp Duty), made foreign buyers pick markets like Australia and Hong Kong instead of Singapore.

In addition, the poor global economic outlook is hurting prospects for high-end housing. China’s slowdown and the weakening Yuan makes Singapore expensive to Chinese buyers, and investors often speculate that a weak global economy means smaller housing packages for expatriates (this in turn means lower rental yields, or even vacancies, in luxury rental units). An exception to the QC are luxury developments on Sentosa Cove – QC only applies to developments on mainland Singapore.

Developers’ response

The initial response of some developers was to de-list. This removed their “foreign” status, and freed them from QC restrictions. SC Global was the first company to de-list while still having unsold luxury property units, and successfully avoided QC penalties. For some companies however, this is not an option. These developers are often pushed toward discounts instead of paying extension charges. These often result in bulk sales that can benefit both home buyers as well as certain companies.

Private equity funds, for example, may be interested in developers with unsold stock; it could be cheaper for developers to bulk sell to these funds at a discount, rather than pay extension charges. We speculate that funds such as the SIS Real Estate Opportunity Fund, which targets high end properties that are undervalued, will have a keen interest in such deals.

As a final alternative, developers may buy the units themselves, thus incurring all the relevant stamp duties including the ABSD. This may not be a viable move for some developers, as the expense of buying the units and paying the stamp duties must not exceed the cost of extensions.

Will it benefit buyers?

Buyers in the luxury market, which is where the sting of the QC is most intently felt, stand to gain the most. Land purchases run into hundreds of millions of dollars, so even a single year’s extension is a considerable sum. The Interlace at Depot Road, for example, could potentially cost CapitaLand as much as $20 million for an extension. In most cases, it is cheaper to offer steep price discounts on units than to pay for the extension.

In 2014, it was reported that Hallmark Residences in Bukit Timah were being sold at discounts of around $300,000. It was also reported that St. Regis at Tanglin Road was selling at 49.5 per cent less than the original asking price, and Hilltops in Cairnhill Circle was selling at 33.2 per cent less. The following are some developments from 2013 that are affected by QC:

At present, many of these developments have not (yet) seen drastic declines in the asking price. A check on 99.co listings shows that prices have not moved much from the transactions recorded on URA. The Interlace, for all the worries about a $20 million QC cost, continues to retain an asking price of around $1,211 psf.

Nonetheless, in the waiting game between developers and buyers, we are confident that developers will flinch first. The government has actively voiced the opinion that property prices must fall further, and that there is presently no consideration of lifting cooling measures. In addition, the ABSD for developers imposes an additional time limit and cost for not quickly selling off stock. This is all good news for buyers looking to upgrade into higher end properties, or investors who are looking for undervalued units. Prices are expected to decline further toward end 2016, as developers grow more desperate to avoid sizeable QC and ABSD costs

99.co, a Singapore-founded startup and property portal helping consumers make the best decisions by finding a home they’ll love with its digital residential site with listings for rent and purchase.